Hot Summer For French Budget!
Over the last 10 days, the downgrading of Italy’s sovereign credit rating from BBB+ to BBB and in the outlook for Portugal from “stable” to “negative” by S&P remind us that most EMU governments remain under negative watch by rating agencies. While these agencies have remained silent since the beginning of the year, it seems that this situation could be once again changing. The impact on the market of the S&P decisions seems nonetheless to have remained muted as peripheral debt yields are still seen as benefitting from the ECB umbrella. Actually, the recent swings in both Italian and Portugal yields have been highly correlated with sentiment on the Fed’s monetary policy. In the case of Italy, the 10Y yield spread vs. Germany has remained fairly stable at around 260/290 bps, a sign of resilience given the rise in market volatility. For Portugal, the recent political crisis has favoured a rewidening but to levels well below those seen last year. However, there is still the risk that the reality of the macroeconomic environment could catch up with sovereign funding costs.
Read the full report: Global Research
Scotiabank